You are responsible for your tax return whether you prepared it yourself or hired a tax preparer. If your tax return preparer commits fraud and that benefits you, that can create trouble for you. Here’s a real-life case that was decided in U.S. Tax Court.
Tax Preparer Fraud Court Case
The government indicted, tried, and convicted tax preparer Gregory D. Goosby of 30 fraud violations where he willfully aided and assisted in the preparation of false and fraudulent income tax returns.
Vincent Allen engaged Goosby to prepare his tax returns before Goosby’s fraud conviction. Allen gave Goosby his W-2, 401(k) statement, mortgage interest statement, and property tax statements.
Goosby used those deductions but also added others, claiming false and fraudulent deductions for charitable contributions, meals and entertainment, and pager and computer expenses.
Statute of Limitations
In general, the IRS has three years from the date you file your tax return to audit it and propose adjustments. In Allen’s case, four years after his returns were filed, two special agents from the IRS’s Criminal Investigation Division interviewed Allen concerning Goosby’s preparation of his income tax returns. Allen agreed with the IRS that the deductions were false and fraudulent, but both the IRS and Allen blamed Goosby. The IRS did not charge Allen with intent to evade taxes (fraud). It only wanted Allen to pay the taxes owed plus the normal amount of interest.
Why the Case Went To Tax Court
The IRS believed this case fraudulent, whether the crime was committed by the preparer or taxpayer. When fraud has been committed, the IRS can audit your return at any time. There is no limit on how far back the IRS can go. Allen disagreed with this view, hired a lawyer, and took his case to U.S. Tax Court. Allen’s lawyer argued that since the three-year statute of limitations had expired, Allen could not be assessed additional taxes.
The Tax Court was asked to decide that even though the fraud was committed by Goosby, the preparer, and not by Allen, the taxpayer, whether the IRS could assess taxes additional taxes on the taxpayer well after the three-year statute of limitations had passed. Does the fraud by the tax preparer extend the statute of limitations on the client’s return?
The Tax Court agreed with the IRS. The tax preparer’s fraud extends the statute of limitations for fraud to the client even when the client is not charged with fraud. This means that if your tax preparer fraudulently prepares your return and you file it, the law extends the period during which the IRS can audit your tax return from the usual three years to forever.
Allen Was Lucky
Although Allen may not have felt lucky after he paid his lawyer fees and handed over $10,000 in taxes, the IRS did not charge him with fraud and the court did not make him pay the 75 percent fraud penalty on the taxes due.
Using a dishonest tax preparer is a mistake. Getting an extra high refund that wasn’t expected is a telltale sign. When the IRS catches the dishonest preparer, it likely catches you, too.